Qatar throws Egypt $3 billion lifeline amid IMF talks

DOHA/CAIRO | By Regan Doherty and Maggie Fick

Qatari Prime Minister Sheikh Hamad bin Jassim al-Thani talks during his news conference with Arab League Secretary General Nabil al-Araby at the end of the Arab League summit in Doha, Qatar, March 26, 2013.

Qatari Prime Minister Sheikh Hamad bin Jassim al-Thani said after talks with Egyptian Prime Minister Hisham Kandil that Qatar would provide an extra $3 billion (1.9 billion pounds) on top of some $5 billion the Gulf state has already given Cairo, and would extend gas supplies to Egypt this summer as needed.

He told a joint news conference that Qatar, the biggest financial backer of Egypt's Islamist-led government, "did not ask for anything in return" for its aid.

Kandil clarified in a statement on his Facebook page that Qatar would buy $3 billion worth of Egyptian government bonds. He dismissed media reports that relations with Doha were strained over a series of tax and regulatory issues affecting Qatari banks seeking to acquire assets in Egypt.

The new financial injection could buy Egypt time as it seeks to avert social unrest over fuel shortages and food price increases during a long, hot summer in the run-up to parliamentary elections expected in October.

But Western diplomats said it was no alternative to an IMF deal, which could unlock up to $15 billion in multilateral and bilateral lending, and improve confidence for foreign and domestic investors.

Earlier, Planning Minister Ashraf al-Araby said Cairo may ask the International Monetary Fund to increase a previously requested $4.8 billion loan to cover its budget deficit.

An IMF delegation has been in Cairo since last week for long-delayed talks on a loan, which would carry conditions requiring reforms of costly fuel and food subsidies and tax increases.

Araby acknowledged there would be social costs to implementing reforms required by the IMF but if Egypt did not reach a deal with the global lender it would be forced to resort to even stricter austerity measures.

CONFIDENCE

Qatar has already provided $5 billion in loans, grants and deposits since Egypt's Islamist President Mohamed Mursi was elected last June. That has slowed the depletion of Egypt's foreign reserves, which slipped to $13.4 billion in March - equivalent to less than three months of imports including vital wheat and fuel.

The government has already announced power cuts and energy saving measures such as closing Cairo airport's two main runways for four hours every night during the summer.

Cairo must convince the IMF that it is serious about reforms including cuts in fuel and food subsidies and tax increases to curb an unaffordable budget deficit and boost growth.

The government reached an initial deal with the Fund last November and announced sales tax increases on 19 categories of goods as well as a tax on dividends and share gains.

The accord was frozen in early December when Mursi suspended the sales tax increases hours after they were officially published, bending to pressure in the face of protests ignited by political conflict over the extent of his powers.

Araby said that the government was now planning to raise sales tax on only six items - cement, iron, telecommunications, cigarettes, and alcoholic and non-alcoholic beverages.

Qatar was angered by Cairo's decision to impose a 10 percent tax on investment gains from the takeover by Qatar National Bank of local lender National Societe Generale Bank, making QNB effectively overpay.

An Egyptian finance ministry aide said on Monday the government had decided to cancel the tax and would reimburse the revenue already levied to shareholders.

Egypt's financial regulator is still holding up a proposed joint venture between QInvest, majority owned by Qatar Islamic Bank, and EFG Hermes, the Middle East's biggest investment bank, which will expire if not approved by May 3.

The deal, which would place EFG's main operations in a company 60 percent owned by QInvest, is politically sensitive in Egypt because both of EFG's chief executives are on trial with the two sons of ousted President Hosni Mubarak over allegations of illegal share dealings in relation to a 2007 transaction.

Economists said flip-flops on taxation were causing uncertainty among investors. The sales tax increases published in the official gazette in December have yet to be cancelled, and it is not clear how the government plans to raise the missing revenue.

"(This) is indeed causing a mess in the market as companies remain legally liable for the new rates, but, practically, the government is not collecting them," Moustafa Bassiouny, an economist at the Signet Institute, told Reuters.

Bassiouny said Araby's latest comments on tax increases showed how government policy was "inconsistent".

Araby said the government was targeting a budget deficit of 9.5 percent of gross domestic product in the fiscal year ending in June and aimed to further reduce the deficit, to 8.5 percent of GDP, by the end of the 2013-2014 fiscal year.

Last month, Araby had said the deficit could swell to 10 percent of GDP in the 12 months to the end of June.

Against most analysts' expectations, Egypt's urban consumer inflation eased to 7.6 percent in the 12 months to March, from 8.2 percent in the 12 months to February, statistics agency CAPMAS said on Wednesday.

Mohamed Abu Basha at EFG Hermes said the figure was well below the bank's prediction of 9 percent year-on-year inflation, due to lower than expected food price increases.

Analysts said inflation was unlikely to continue to ease, however, given the depreciation of the Egyptian pound and planned subsidy cuts, and was likely to accelerate this year.